[Senate Hearing 109-989]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-989

                    PIRACY OF INTELLECTUAL PROPERTY

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON INTELLECTUAL PROPERTY

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 25, 2005

                               __________

                          Serial No. J-109-22

                               __________

         Printed for the use of the Committee on the Judiciary














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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
                       David Brog, Staff Director
                     Michael O'Neill, Chief Counsel
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

                 Subcommittee on Intellectual Property

                     ORRIN G. HATCH, Utah, Chairman
JON KYL, Arizona                     PATRICK J. LEAHY, Vermont
MIKE DeWINE, Ohio                    EDWARD M. KENNEDY, Massachusetts
LINDSEY O. GRAHAM, South Carolina    JOSEPH R. BIDEN, Jr., Delaware
JOHN CORNYN, Texas                   DIANNE FEINSTEIN, California
SAM BROWNBACK, Kansas                HERBERT KOHL, Wisconsin
TOM COBURN, Oklahoma                 RICHARD J. DURBIN, Illinois
                  Bruce Artim, Majority Chief Counsel
                Bruce A. Cohen, Democratic Chief Counsel

































                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Biden, Hon. Joseph R., Jr., a U.S. Senator from the State of 
  Delaware, prepared statement...................................    33
Cornyn, Hon. John, a U.S. Senator from the State of Texas, 
  prepared statement.............................................    35
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     1
    prepared statement...........................................    46
Leahy, Hon. Patrick J. Leahy, a U.S. Senator from the State of 
  Vermont........................................................    15
    prepared statement...........................................    56

                               WITNESSES

Hackford, Taylor, Board Member, Directors Guild of America, Los 
  Angeles, California............................................    22
Holleyman, Robert, President and Chief Executive Officer, 
  Business Software Alliance, Washington, D.C....................    27
Mendenhall, James, Acting General Counsel, Office of the U.S. 
  Trade Representative, Washington, D.C..........................     8
Peters, Marybeth, Register of Copyrights and Associate Librarian 
  for Copyright Services, Copyright Office, Washington, D.C......     3
Pinkos, Stephen M., Deputy Under Secretary of Commerce for 
  Intellectual Property and Deputy Director, U.S. Patent and 
  Trademark Office, Alexandria, Virginia.........................     6
Smith, Eric H., President, International Intellectual Property 
  Alliance, Washington, D.C......................................    19

                       SUBMISSIONS FOR THE RECORD

Hackford, Taylor, Board Member, Directors Guild of America, Los 
  Angeles, California, prepared statement........................    37
Holleyman, Robert, President and Chief Executive Officer, 
  Business Software Alliance, Washington, D.C., prepared 
  statement......................................................    48
Mendenhall, James, Acting General Counsel, Office of the U.S. 
  Trade Representative, Washington, D.C., prepared statement.....    58
NBC Universal Pictures, charts...................................    70
Peters, Marybeth, Register of Copyrights and Associate Librarian 
  for Copyright Services, Copyright Office, Washington, D.C., 
  prepared statement.............................................    74
Pinkos, Stephen M., Deputy Under Secretary of Commerce for 
  Intellectual Property and Deputy Director, U.S. Patent and 
  Trademark Office, Alexandria, Virginia, prepared statement.....    87
Smith, Eric H., President, International Intellectual Property 
  Alliance, Washington, D.C., prepared statement and attachment..   102
Trainer, Timothy P., President, Global Intellectual Property 
  Strategy Center, P.C., Washington, D.C., prepared statement....   145





 
                    PIRACY OF INTELLECTUAL PROPERTY

                              ----------                              


                        WEDNESDAY, MAY 25, 2005

                              United States Senate,
                     Subcommittee on Intellectual Property,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 2:34 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch, Chairman of the Subcommittee, presiding.
    Present: Senators Hatch and Leahy.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    Chairman Hatch. All right, we have had enough frivolity 
here. We have got to go to work, so welcome to today's hearing 
before the Intellectual Property Subcommittee.
    Today, we will be examining a variety of problems and 
challenges involving international piracy, and that is 
international piracy of U.S.-owned intellectual property. This 
hearing will focus on copyright piracy, but I hope the 
Subcommittee will be mindful of the serious issues in the 
trademark counterfeiting and patent infringement realms as 
well.
    Piracy and counterfeiting inflict significant and 
widespread harms on the American economy. Theft of intellectual 
property abroad is disastrous and very much disadvantages this 
country's entrepreneurs, innovators and, of course, the 
creative community. Ultimately, it also harms consumers, 
shareholders and American workers and their families.
    The timing of this hearing was intended to coincide roughly 
with a number of recent developments and events relevant to our 
consideration of piracy issues. On April 29, 2005, the Office 
of the United States Trade Representative issued its decision 
resulting from the out-of-cycle review of China's enforcement 
practices, and completed the special 301 process. Much of the 
focus in that process and in USTR's conclusions remains on the 
inadequate enforcement of intellectual property rights in 
Russia and China.
    Russia remains on the Priority Watch List this year due to 
continuing problems with its legal regime, which is described 
as having weak intellectual property enforcement and a lack of 
data protection. It appears that Russia's current intellectual 
property regime is inconsistent with its bilateral trade 
obligations and likely does not conform to the obligations 
which Russia needs to fulfill in order to join the WTO.
    Other recent events that have prompted some additional 
interest and scrutiny on both sides of the Hill include a 
number of studies and reports on piracy and counterfeiting 
which indicate that we are not making much headway in many 
areas. And I might add that some of these suggest some very 
disturbing trends in other areas as well. For example, various 
analyses indicate that piracy level in many sectors are close 
to or exceed 90 percent in China. In Russia, the overall losses 
to copyright-related industries have continued to increase and 
are, at least in my opinion, at unacceptable levels.
    Today, we will hear a description of the big-picture issues 
in the fight to protect U.S. interests and to ensure that 
American export products reliant on intellectual property 
rights receive appropriate attention and protection. We will 
also hear specific experiences and instances that illustrate 
how rapidly and widely pirated works reach countries around the 
globe. For example, it was recently reported that unauthorized 
disks of the new ``Star Wars'' movie were on sale on the 
streets of Beijing just days after the film's premiere. My 
understanding is that Mr. Hackford, who directed the movie 
``Ray,'' has had a very similar experience with his film.
    We also will discuss the importance to the U.S. economy of 
the industries that rely most heavily on intellectual property 
rights. For example, according to the International 
Intellectual Property Alliance and other sources, the core U.S. 
copyright industries account for about 6 percent of our total 
United States gross domestic product. Employment in these 
industries has recently been estimated at 5.5 million workers, 
or 4 percent of total U.S. employment. Between 1996 and 2002, 
the information technology sector grew by 26 percent. This is a 
growth sector for the United States economy and in my own home 
State of Utah and one of the few areas in which we really have 
a positive balance of trade.
    I also want to point out that piracy of entertainment 
products is not the sole concern in the copyright realm. 
Although movies and music receive a lot of attention today, we 
are going to hear this day from Mr. Holleyman of the Business 
Software Alliance about a recently released report indicating 
that software piracy just in the Asia-Pacific region alone cost 
manufacturers in this country an estimated $8 billion in 2004. 
Losses due to software piracy worldwide are estimated at more 
than $32 billion, with predicted piracy rates of 90 percent in 
some countries.
    In preparing for this hearing, we asked witnesses to 
provide both a general description of the global state of 
affairs on intellectual property rights, as well as a 
discussion of specific areas of concern to them respectively. 
From the testimony, it appears that most of the witnesses have 
serious concerns about Russia and China. This is consistent 
with the feedback that I have received from a wide variety of 
sources.
    I note, however, that recent reports have also highlighted 
longstanding and serious problems particularly in the area of 
optical media piracy in places such as Pakistan, Malaysia and 
the Philippines. And although there has been progress in some 
areas, it does not appear at least to me that consistent 
headway is being made in many countries.
    Finally, I note that today's hearing is particularly timely 
because the Chinese delegation to the Intellectual Property 
Working Group of the Joint Commission on Commerce and Trade is 
scheduled to meet here in Washington to discuss some of these 
issues with Government officials. Now, I am hopeful that some 
progress will be made, and I stand ready to provide whatever 
assistance is necessary to move forward on these very important 
issues.
    Let me close by observing that during the Cold War it was 
said that the Soviet Union's style of negotiation could be 
summed up as follows: what is mine is mine and what is yours is 
negotiable. If Russia, China or any other government attempts 
to adopt this view with respect to their responsibilities to 
protect intellectual property under international trade law and 
agreements, I can assure you that public support for U.S. trade 
agreements will be undermined and there will be a strong 
resistance from, and appropriate action taken by, members of 
Congress.
    To put a fine point on it, before the Congress votes in 
favor of Russia joining the WTO, many of us will have to be 
convinced that the Russian government is serious about cracking 
down on theft of U.S. intellectual property. As the ranking 
Republican on the Finance Committee and the Chairman of this 
Subcommittee, I have a particular interest in the intellectual 
property problems that will be outlined today, and I intend to 
work with members of both sides of the aisle and in both 
committees to ensure that these issues receive the attention 
and resolution they merit.
    I know that Senator Leahy and many others, such as Senators 
and Cornyn and Feinstein, are concerned about these problems as 
well. So I look forward to hearing from the witnesses and I 
want to thank all of you for coming and for testifying here 
today and I believe this hearing should be a very good hearing.
    [The prepared statement of Senator Hatch appears as a 
submission for the record.]
    We will begin the hearing by turning to our stalwart, 
Marybeth Peters, who is Register of Copyrights and Associate 
Librarian for Copyright Services of the United States Copyright 
Office right here in Washington, D.C. After Marybeth, we will 
turn to Stephen M. Pinkos, the Deputy Under Secretary of 
Commerce for Intellectual Property and Deputy Director of the 
United States Patent and Trademark Office, in Alexandria, 
Virginia. Then we will turn to James E. Mendenhall, the Acting 
General Counsel of the Office of the United States Trade 
Representative.
    We welcome all three of you here today and we look forward 
to taking your testimony at this time.

   STATEMENT OF MARYBETH PETERS, REGISTER OF COPYRIGHTS AND 
  ASSOCIATE LIBRARIAN FOR COPYRIGHT SERVICES, U.S. COPYRIGHT 
                    OFFICE, WASHINGTON, D.C.

    Ms. Peters. Thank you, Mr. Chairman. Thank you very much 
for the opportunity to speak to you today about one of the most 
pressing issues in copyright--international piracy. It is 
always a pleasure to appear before you, and I am pleased to see 
the reestablishment of the Subcommittee and I congratulate you 
on your chairmanship.
    Mr. Chairman, in my nearly 40 years in the Copyright 
Office, piracy, and especially global piracy, has been an 
enduring problem. We can and should strive to reduce piracy to 
the lowest levels possible, levels that will not deny authors 
and copyright owners of the incentives to create and distribute 
the works that have made America's creative industries the envy 
of the world.
    The Copyright Office has had a long history in working 
toward this goal both on its own initiative and in cooperation 
with other agencies of the Federal Government. In the ten years 
since the adoption of the TRIPs Agreement, there have been 
tremendous improvements worldwide in countries' legal 
frameworks for copyright protection. By incorporating the 
substantive copyright obligations of the Berne Convention and 
supplementing them the civil, criminal and border enforcement 
obligations, TRIPs established a minimum standard against which 
all countries' copyright regimes could be judged.
    The Office's contribution to this success includes 
participation in the negotiation of the TRIPs agreement and 
other copyright treaties and agreements, as well as training of 
foreign officials. Our main program for training foreign 
copyright officials is our International Copyright Institute. 
This program exposes foreign officials from developing and 
countries in transition to a wealth of copyright knowledge and 
information presented by the U.S. Government and foreign and 
domestic industry experts.
    The Copyright Office works hand in hand with USTR on 
bilateral and regional trade agreements, including negotiations 
implementing the free trade agreements. We also support USTR 
free trade agreements by providing technical assistance to our 
negotiating partners.
    The Office is a major contributor to the strengthening of 
copyright protection through international organizations, 
notably the World Intellectual Property Organization. It played 
a key role in the negotiation of the WIPO Internet treaties 
which are substantially improving the legal framework for the 
protection of copyright in numerous countries around the world, 
including our own copyright law.
    I believe United States copyright law does the best job of 
providing appropriate protections to authors and copyright 
owners, while still allowing for fair and reasonable use of 
copyrighted material. But our law is not perfect and when we go 
to other countries seeking improved copyright protection, they 
are quick to point out the deficiencies and gaps in our law.
    For example, the United States has not amended its law to 
delete a provision of Section 110(5) added to our law in 1998 
which significantly broadened the exemption for performance of 
musical works in public places like bars and restaurants. A WTO 
dispute resolution panel has determined that this expansion is 
inconsistent with our TRIPs obligations. Also, because our law 
has extremely narrow performance rights for sound recordings, 
many countries limit protection for U.S. rights-holders to only 
the protection that we provide, despite the popularity and 
widespread of U.S. recordings overseas.
    No matter how good a country's law is on the books, 
enforcement of that law is essential to effective copyright 
protection, which is why the TRIPs Agreement contains specific 
provisions requiring adequate and effective enforcement 
measures.
    Our FTAs have built upon the TRIPs enforcement text by 
adding specificity to what is found in TRIPs and other 
obligations not found in TRIPs. The FTAs also provide us with 
the flexibility to address enforcement problems that are 
particularly problematic in a given region or country.
    The fact remains, however, that copyright enforcement in 
too many countries around the world is extremely lax. China is 
a good example of why enforcement is absolutely essential to 
the protection of copyright. As China joined the WTO in 2001, 
the Office worked with the USTR-led interagency team to provide 
technical advice and to urge the Chinese government to amend 
its law to be TRIPs-compliant. While its revision feel short in 
several important respects, the law is more than sufficient to 
provide some meaningful protection if it is enforced. 
Unfortunately, it is not.
    Last year, China made a number of commitments to improve 
various aspects of its intellectual property regime, most 
notably with regard to enforcement. Shortly before meetings in 
which those commitments were made, the Office hosted a 
delegation of Chinese officials, led by the National Copyright 
Administration. We have enjoyed a 25-year relationship with 
them which has helped promoted greater understanding between 
our governments. But NCAC does not have the final say on 
copyright policy and enforcement in China and China's 
implementation of last year's commitments has been incomplete.
    Russia has been on the Priority Watch List since 1997. 
According to IIPA, piracy rates in China in 2004 for most 
sectors are about 80 percent and losses are beyond $1.7 
billion. Obviously, there is a serious problem in Russia. The 
Copyright Office is committed to be a member of interagency 
efforts to combat intellectual property violations in Russia. 
Certainly, statements by President Putin and other high-ranking 
government officials indicate a comprehension of the serious 
nature of the problem, but piracy remains and we haven't gotten 
the desired results.
    There are two causes of inadequate enforcement: one, lack 
of competent police, prosecutors and/or judges, and, two, lack 
of political will to enforce copyright. We and others do our 
best through training programs to address the first problem. 
The second, lack of political will, is much more difficult.
    Let me say something about the nature of piracy that we see 
in other countries. Much of it is done by for-profit criminal 
syndicates. Factories through China, Southeast Asia, Russia and 
elsewhere are churning out millions of copies of copyrighted 
works, sometimes before their authorized release. These 
operations most certainly involve other criminal activities, 
and although the information is sketchy at best, there have 
been a series of rumored ties between pirating operations and 
terrorist organizations.
    What is problematic is that some American commentators who 
are prone to hyperbole are providing arguments and 
rationalizations that foreign governments are using to defend 
their failure to address this type of organized crime. The 
confusion wrought by the imprecision and lack of clarity in 
these commentators' statements is not helpful to achieving the 
goal for which there is no credible opposition--dramatic 
reduction in organized piracy of U.S.-copyrighted works abroad.
    International piracy poses a tremendous threat to the 
prosperity of our creative industries and it deserves our 
utmost attention. This attention must be consistent and long-
term if it is to be successful, but we must be realistic in our 
goals, lest we become discouraged. While it is not realistic to 
expect to eliminate all piracy, we can assist in improving the 
global situation to the benefit of authors and rights-holders 
here in the United States and throughout the world.
    Thank you.
    [The prepared statement of Ms. Peters appears as a 
submission for the record.]
    Chairman Hatch. Thank you, Ms. Peters. We really appreciate 
that.
    Mr. Pinkos, we will turn to you.

   STATEMENT OF STEPHEN M. PINKOS, DEPUTY UNDER SECRETARY OF 
COMMERCE FOR INTELLECTUAL PROPERTY AND DEPUTY DIRECTOR, UNITED 
    STATES PATENT AND TRADEMARK OFFICE, ALEXANDRIA, VIRGINIA

    Mr. Pinkos. Thank you, Mr. Chairman, and I appreciate the 
opportunity to join with you today in a discussion about 
international piracy issues. I have a deep respect for the role 
that the Judiciary Committee plays, or the leading role that it 
plays in crafting our Nation's intellectual property laws and 
oversight of the agencies that implement them, and I think much 
of them is spawned from the fact that I spent six years as a 
staff member of the Judiciary Committee over on the other side 
of the Capitol.
    In fact, I think my last memory of this room is being in 
here a couple of years ago as we negotiated the PROTECT Act 
while we tried to catch glimpses of the NCAA Championship game 
in the other room right there. Luckily, the result of the 
legislative effort was strong and the game depended on whether 
you were--I think it was Kansas or Syracuse that year.
    I wanted to emphasize that the Bush administration is 
keenly aware and fully understands that intellectual property 
protection is critical to the competitiveness of our economy, 
and that U.S. businesses face enormous challenges in protecting 
their IP overseas.
    Secretary of Commerce Gutierrez, who has just been on the 
job for five months or so, is also very aware of the 
significance of intellectual property for America and he has 
made combatting piracy one of his top priorities. The U.S. 
Patent and Trademark Office is dedicated to carrying out his 
vision of marshaling all U.S. Government efforts and agencies 
to reduce IP theft.
    As you noted, Mr. Chairman, increasingly both the United 
States and our trading partners rely on IP to drive economic 
growth. The statistics you cited show that IP-based businesses 
such as software and entertainment now represent the largest 
single sector of our U.S. economy.
    Unfortunately, the economic benefits of intellectual 
property have also captured the attention of thieves and 
organized crime and, as Marybeth mentioned, even terrorists. 
Because of that, the threats to U.S. economic safety and 
security, the administration is working hard to curb IP crime 
and to strengthen enforcement around the world.
    I am certain that many of you and your colleagues have 
heard about the STOP initiative, which is the Strategy 
Targeting Organized Piracy. It is a White House-coordinated 
effort of all U.S. Government agencies that are involved in 
protecting IP and it is the most comprehensive U.S. Government-
wide initiative yet. It is designed to simply eliminate trade 
in pirated and counterfeited goods worldwide, and the greatest 
benefit thus far has been bringing a lot of agencies together 
to discuss the different efforts that they have underway to 
stop trade in counterfeit and pirated goods.
    We are seeing some results: a report on behalf of some of 
my other colleagues in the administration that the Department 
of Homeland Security is increasing seizures. They are applying 
new technologies and accounting methods to try to stop bogus 
goods coming over our borders. DOJ, as you are well aware in 
your oversight of that agency, is stepping up their 
prosecutions and increasing the amount of special units they 
have for IP crimes.
    Over at the Department of Commerce, we are trying to inform 
U.S. businesses how to best protect their rights with a new 
hotline and a website and some training programs around the 
world. And specifically in the United States, Mr. Chairman, we 
started this week a series of seminars for small and medium-
size enterprises. This applies more for the patent and 
trademark world, but we were out in Utah Monday and Tuesday of 
this week and we had over 200 businesses represented in our 
seminar out there. Jon Dudas represented the agency there and 
from all accounts, it was quite a success. We are expanding 
that around the country and we are having a couple that are 
China-specific as well. We did one in Baltimore and we are 
going to Detroit soon.
    As I mentioned, USPTO is engaged in enforcement and 
training efforts around the globe and here. We have offered 
training and technical assistance to 55 different countries and 
we have trained hundreds, if not thousands, of officials--
judges, prosecutors, legislators--in how to have a strong IP 
system and then how to enforce, as well.
    We have had particular focus on China and one of the things 
we are trying to do in China is, as has been stated, they have 
some good laws on the books, but they need to implement them 
and they need to enforce them. They have one of the fastest 
growing patent and trademark offices in the world and we are 
trying to give them the technical assistance so that when U.S. 
businesses go to protect their property there, the offices 
actually function as they should.
    As was mentioned by you, the Joint Commission on Commerce 
and Trade is meeting this week here in Washington, and the 
Working Group on IP, which is chaired by Mr. Mendenhall's 
colleague, Deputy Ambassador Josette Shiner, along with Jon 
Dudas, are meeting with the Chinese and we are pressing them to 
implement an IPR action plan that will address some specific 
IPR problems.
    The PTO remains active at WIPO, which is always a unique 
institution to deal with. It is represented by developed and 
developing countries, but we work with them to set these 
international standards for IP protection and enforcement, and 
work to harmonize IP laws to the greatest extent possible. And 
we are trying to break some ground with a broadcasters treaty 
there, after the success of the Internet treaties.
    USPTO is also working closely with the USTR to provide the 
support they need with free trade agreements, and we have been 
fortunate, I think, with some of the recent trade agreements 
with Singapore and Chile and Morocco to have state-of-the-art 
IP protections in those agreements--what we like to call TRIPs-
plus, going above and beyond what TRIPs requires.
    Mr. Chairman, just to say in closing counterfeiting and 
piracy do appear to be on the rise, but the administration, I 
think, is making progress in attacking the problem. There is a 
lot of work that needs to be done, but I am personally 
increasingly hopeful that with the continued coordination among 
agencies and the administration, work with this Subcommittee 
and other committees in Congress, and with private industry as 
well--they are a big partner in this--we can continue to do 
more to help American businesses protect their important 
intellectual property.
    Thank you.
    [The prepared statement of Mr. Pinkos appears as a 
submission for the record.]
    Chairman Hatch. Well, thank you so much.
    Mr. Mendenhall, we will take your testimony at this time.

 STATEMENT OF JAMES MENDENHALL, ACTING GENERAL COUNSEL, OFFICE 
       OF THE U.S. TRADE REPRESENTATIVE, WASHINGTON, D.C.

    Mr. Mendenhall. Thank you, Mr. Chairman, and thank you for 
inviting me here today and giving your attention to this 
critical issue to our economy.
    The protection of intellectual property and access for U.S. 
goods dependent upon IP protection is at the top of USTR's 
enforcement agenda. In the area of trade, IPR protection is one 
of the most important and certainly one of the most complex 
issues that we face today. Yet, we are pursuing this issue with 
single-minded resolve. We are making some progress. Clearly, a 
lot of work needs to be done.
    But to preserve our economic strength, we have to cultivate 
an atmosphere of creativity and innovation both in the United 
States and abroad. And if that atmosphere doesn't exist, we 
have to create it, and that means in part strengthening IP 
rules around the world. We had a good start with that with the 
TRIPs Agreement, the global rules on intellectual property. But 
without enforcement of those rules, those rules are 
meaningless.
    Now, two points about enforcement. Ensuring enforcement is 
actually often harder than negotiating the rules themselves. 
Enforcement requires political will from legislators, 
prosecutors, judges, police and administrators at all levels of 
government, and that is hard to litigate. If we go to dispute 
settlement, it is hard to craft a rule which compels political 
will, but political will is essential if we are going to be 
successful in this mission.
    Furthermore, ensuring enforcement is not solely about 
bringing dispute settlement cases against our trading partners. 
Dispute settlement is a valuable tool, but neither dispute 
settlement nor, in fact, any particular legal mechanism is the 
silver bullet here. When we talk about enforcement, we are 
talking about getting results. We need to think outside the box 
and it is not a one-size-fits-all solution. The solutions 
involve pushing multiple levers in the right sequence and with 
the right amount of pressure.
    Now, let me give you a couple of examples of what we have 
done over the past year where we have had some success. Every 
year, as you know, the U.S. Trade Representative's office 
issues a special 301 report cataloguing IPR problems around the 
world and putting countries in a hierarchy of wrongdoing, from 
Watch List, to Priority Watch List, to Priority Foreign 
Country. This year, we have done 50, 60 countries, perhaps more 
than that, in our special 301 report.
    One of them, for example, is Pakistan, which you mentioned 
in your opening statement. Pakistan is on the Priority Watch 
List this year, as they have been for a while, in large part 
because they have within their borders a series of well-known 
plants churning out pirated copies of optical disks, millions 
of them over the past several years. We have taken every 
opportunity to raise the issue with Pakistan. We have put on 
the Priority Watch List again this year. Five days later, 
Pakistan shut down six of those plants.
    We also use the carrot-and-stick approach that we have 
through using our preference programs, like the GAP program. 
Over the past six months or so, we have worked closely with 
Brazil, for example, where we have indicated to them that they 
would face the possibility of revocation of GAP benefits if 
they don't put their enforcement house in order. Recently, as a 
result of our efforts, Brazil has undertaken a very 
comprehensive action plan, including many elements, in fact, 
suggested by U.S. industry.
    Now, with both Pakistan and Brazil, we have a lot of work 
to do, so I don't mean to say our work is done there. But there 
are many levers that we can use and that we need to bring to 
bear on this project. Dispute settlement, of course, is a key 
tool that we need to use, and we have used it and we will use 
it again if that is the most effective way to achieve our 
objectives. We recently won a case, for example, against the E 
on the protection of geographical indications. We are willing 
to do that again if, as I said, that is the most effective tool 
available to us, which brings us to China.
    Now, it comes as no surprise to you or anyone in this room, 
I am sure, that China is perhaps our number one enforcement 
challenge when it comes to IPR. On China, when we have a 
problem, many folks have a knee-jerk reaction that we should go 
immediately to dispute settlement. We have gone to dispute 
settlement before with respect to China in other areas. In 
fact, the United States is the only country in the world that 
has ever challenged China in dispute settlement, which we did 
last year. We got a successful resolution of a case involving a 
tax matter.
    We have utilized WTO procedures even earlier this week, 
when we requested consultations with China on a direct sales 
regulation that they are proposing. It is not formal dispute 
settlement, but they are WTO procedures that we are making use 
of, and we will continue to do that.
    Now, WTO rules are clearly going to be helpful to us in 
IPR, which I will get to in a minute about how those two 
relate. But I want to give you a quick overview of what we have 
done on our China strategy over the past year.
    First, we have held China to its existing obligations. We 
have negotiated new commitments, when appropriate, to fill any 
gaps that may exist. Second, we have monitored progress on the 
ground in close coordination with our industry to ensure that 
those commitments are being implemented. And if not, we have 
ratcheted up pressure on China and will continue to do so to 
ensure that those commitments are fulfilled.
    Now, over the past year we have moved through all these 
phases with China. Last year at the JCCT meeting, we negotiated 
a set of new commitments on IPR, with the overall objective of 
significantly reducing piracy and counterfeiting. A month 
later, we dedicated a section of our special 301 report 
indicating that we take those obligations seriously, that we 
would monitor their implementation and we would seek to ensure 
that they are implemented, and that we would review the matter 
in an out-of-cycle review that, in fact, we started in December 
of last year.
    In the summer of last year, we took an unprecedented step 
of issuing an open letter to industry soliciting information on 
enforcement problems in China. We reiterated that request when 
we started the out-of-cycle review and again when we sent the 
questionnaire to every member of Congress asking that they work 
with us to inform their constituents of problems in China and 
help us build a database.
    At the end of that process, the out-of-cycle review results 
in April, we put China on the Priority Watch List. We have 
ratcheted up the pressure on them. China wasn't happy with it, 
but we thought the report card that we gave them was 
appropriate, given the lack of progress that we have seen.
    This week, as has been discussed, we are working with China 
through the IPR Working Group under the JCCT. In the coming 
weeks, we are going to be issuing a request through WTO rules 
seeking additional information from China on the status of 
enforcement in the country. And then we are going to be working 
with industry over the coming months to refine our arguments, 
collect additional information to fill any holes that we may 
have.
    We have seen some progress in China. We saw China issue new 
judicial interpretations in December of last year making it 
easier to bring criminal cases. We have seen other steps they 
have taken, including a nationwide campaign, but we haven't 
seen enough progress and we need to consider carefully what our 
next steps will be.
    Now, if we are going to go forward and we are going to 
utilize WTO procedures, we have to have our facts in order. We 
have to have a full and complete docier of information to prove 
our case. Everybody knows it is a problem. Everybody around the 
world knows it is a problem. The Chinese know it is a problem, 
but we have to have a full evidentiary basis to prove our case 
with them if we expect them to make serious progress. Now, we 
have worked with industry over the past couple of months to do 
that. We hope you and members of Congress will work with us to 
work with industry to gather that information as appropriate.
    Just a word on Russia. Here again, we have got a serious 
enforcement problem well-known to you and others, of course. We 
have taken a series of steps to try to increase pressure on 
Russia to improve their IPR regime. We have raised the issue at 
the presidential level. We have put them on the Priority Watch 
List again this year. We are having an out-of-cycle review on 
China later this year.
    We continue to review the petition the copyright industry 
has filed to withdraw GAP benefits, and we are continuing to 
raise the issue as a critical issue to be addressed in the WTO 
accession negotiations. Ultimately, again, any progress in this 
area is going to depend on the political will of Russia's 
leadership. We will continue to press Russia to undertake that 
commitment to crack down and deal with this problem straight 
on.
    Finally, just two closing remarks. As I indicated in the 
beginning of my statement, we have a good foundation with the 
TRIPs rules on enforcement. They need to be elaborated upon, 
they need to be fleshed out further. We have started that 
process with our FTAs, as my colleagues on the panel indicated. 
We have dedicated about half of our IP chapters and our FTAs to 
enforcement and we are working through the strategy targeting 
organized piracy to build a global consensus on the need for IP 
enforcement and build the machinery to ensure that we have the 
tools available to us, working with our trading partners, to 
cleanse international trading lanes of pirating counterfeit 
goods.
    Thank you.
    [The prepared statement of Mr. Mendenhall appears as a 
submission for the record.]
    Chairman Hatch. Well, thanks to all three of you. Let me 
just ask a couple of questions.
    The collective picture the administration witnesses paint 
of the problem of China is stark and unattractive to me. It is 
obviously disastrous for our software manufacturers that 90 
percent of software installed on computers in China was as a 
result of pirating of intellectual property.
    I understand that the American film industry used to be 
able to say that they had a positive balance of trade in every 
country in which they do business, but I also understand that 
this is no longer the case with one country, and that is China. 
This is not because they are an international film-making 
powerhouse, and while I am sure the Chinese are making some 
good films, I am also told that the Chinese will not let the 
American film industry compete fairly in China. I also 
understand that whenever a new American film opens, illicit 
copies are available on the streets in Beijing almost the same 
day as they are shown, or within days after they are shown. And 
all of this is taking place when we have big trade deficits 
with China.
    You have all touched on this to a degree, but I would like 
you to just be more specific. What are you doing to fix the IP 
theft problem in China and what can Congress do to help you? 
What can we do, if anything, to help you in this area?
    Mr. Mendenhall. Clearly, the copyright problem--the movies, 
music, and so on--in China is an extremely serious issue that 
we take extremely seriously. We have worked very closely with 
our industries to get a sense for the real problems they face 
on the ground and figure out what the best steps forward would 
be.
    When we talk about movies, in particular, which is what 
your question focused on, we have got a couple of problems. One 
is that China puts a cap on the number of movies that come into 
the country every year to be shown in theaters and such. As a 
result of that cap, China effectively creates a market for 
pirate movies to come in; that is to say for the 20 or so 
movies that are allowed in, there may be 30 additional movies 
that our industries would like to show and that people would 
like to see. As a result, there is a black market that grows up 
with respect to those particular movies. So we have a market 
access problem that contributes to the creation of a black 
market.
    We also have the problems that we face in a lot of other 
sectors, including the fact that there just simply is a lack of 
enforcement in China. There are plants turning out millions of 
optical disks that aren't being shut down. If they are shut 
down, they may open the next day; the vendors, the same thing. 
They may be shut down and they open the next day.
    Now, the steps that we have to take are complicated, as I 
indicated in my remarks. We have tried to work with the Chinese 
cooperatively. We have set for them overall objectives of 
significantly reducing piracy and counterfeiting, as well as 
specific objectives. The work plan that Mr. Pinkos referred to 
that we are talking to the Chinese about this year is quite 
detailed, asking them to take specific steps to build up their 
enforcement machinery at all levels, and we have worked very 
closely with the Chinese on that.
    Now, the Chinese may balk at that. As I said, they think 
they are doing a lot. We haven't seen the results yet, so I 
can't tell you what the results of those discussions are going 
to be. If we don't see results, though, we do need to think 
about next steps we need to take in this area, and that may 
include working perhaps within the WTO procedures, as we 
indicated in our out-of-cycle review results. So we're working 
the diplomatic angle and the negotiation angle as much as we 
can. If there is nothing more to be gained about that, we do 
need to think about next steps and that may be for the 
utilization of WTO procedures.
    Chairman Hatch. Is there anything we can do that we are not 
doing that would better help you there?
    Mr. Mendenhall. Well, as I indicated, I think what would be 
most helpful is if we all worked together cooperatively; the 
administration, Congress and the industry work together to, 
one, give a united and consistent message to the Chinese that 
this is a serious problem that has to be grappled with. Two, we 
need to impress upon--well, we need to work together to ensure 
that both the private sector and the Government bring the 
proper amount of resources to bear upon this issue, which 
includes not only resources for data collection purposes, but 
also legal resources appropriate for us to build and refine our 
arguments, build our database so that we can go to the Chinese 
and present a very solid case, backed up by evidence, that 
something needs to be done here.
    Chairman Hatch. I guess I am asking you are there aspects 
of U.S. law that, in your opinion, need to be changed to assist 
you in your efforts to combat international piracy.
    Mr. Pinkos. I don't know if there are laws that will help 
us deal specifically with China. I think the administration is 
working on a legislative package to submit to the Congress that 
will help rights-holders enforce their rights here in the 
United States a little more aggressively. The Department of 
Justice is working on that, and the Patent and Trademark Office 
and Customs. So we would like to work with you on that as we 
bring some items forward.
    Mr. Chairman, if I could suggest something that I think is 
helpful that I think many of you know intuitively, but when you 
all travel abroad to take a strong message, but not just to 
China, but really, as Mr. Mendenhall alluded to, this is going 
to require an effort in China specifically, among multiple 
nations.
    Chairman Hatch. Well, I have the same basic question with 
regard to Russia. It is a big problem, too, and the question is 
what can we do now to stop the widespread and growing piracy of 
U.S.-owned and U.S.-developed intellectual property in Russia. 
It is a big, big problem over there, as well.
    Mr. Pinkos. That is exactly right, and we are raising it at 
the highest levels, as Mr. Mendenhall said, with the President, 
and likewise analyzing their progress in terms of their WTO 
ascension, as you mentioned in your statement as well.
    Chairman Hatch. Well, to be honest with you, I am not going 
to ask you what Congress can do to help with the situation in 
Russia because I hear a growing number of my colleagues are 
complaining and very upset and grumbling about their concern 
that if we go along with ascension to the WTO, Russia is going 
to become the new China, and they will do it blatantly when it 
comes to attempting to gain the benefits of free trade for its 
citizens at the same time it acts to hurt the interests of U.S. 
copyright-holders and U.S. workers and investors and their 
families by avoiding the responsibilities under the 
international trade agreements and in areas where both Russia 
and China almost blatantly flaunt their theft of U.S.-owned 
intellectual property materials.
    Before I ask you to specifically comment on the situation 
in Russia, particularly on the role of organized crime in 
intellectual property theft over there, I want to make a few 
comments on the state of affairs between the Senate and the 
administration on trade issues.
    Everyone knows that the situation with CAFTA is fraught 
with difficulties and that the administration is going to need 
every supporter that it can both on the Hill and in the public 
as well. Everyone on the Judiciary Committee members only too 
well the misadventures we had when USTR negotiators included 
immigration language in several trade agreements last Congress 
that caused enough furor on the Judiciary Committee to actually 
unite us on a bipartisan basis, and that was not easy to do on 
this Committee, I have to admit.
    One of the messages we conveyed, and the House Judiciary 
Committee as well conveyed to the administration is that we 
want to be consulted and taken seriously on these types of 
issues. Many of us in the Senate have felt from time to time 
that either those in the administration who have been working 
directly are not taking back our concerns, or if they are, 
these concerns are not being effectively conveyed or listened 
to or considered.
    I have been a strong supporter of free trade and everybody 
knows that, and I hate to see the increasing erosion of support 
among the public and within Congress for trade agreements 
especially with people like me. But one way to help reverse 
this growing tide against trade agreements is to be able to 
assure the public and the Congress that the U.S. Government is 
standing up for our rights in areas where we lead the world, 
such as the intellectual property-dependent sectors of 
software, entertainment, information technology and 
biotechnology. There is a growing weariness that while we may 
have all the right words on the paper, at the end of the day 
there is no teeth in the words. And when it comes down to 
enforcing the laws against the outright, flagrant theft of U.S. 
intellectual property, there is no strength behind that.
    So with that, I would just ask all of you to comment on the 
situation in Russia and whether the Russian government is 
effectively combatting IP theft by organized crime in Russia, 
and if you could comment very quickly because we will turn to 
Senator Leahy as soon as you are through.
    Ms. Peters. Clearly, the answer is no, they are really not 
doing enough. They actually do have an Internet piracy problem. 
Many of us realize that in the United States we also have a 
problem that you and Senator Leahy tried to address last year 
and time ran out, and we are waiting to see what happens in the 
Grokster case. But if it comes out, quote, ``the wrong way''--
    Chairman Hatch. We are all waiting for that, aren't we?
    Ms. Peters. If it comes out the wrong way, you may have to 
take the effort back up again because people will look to the 
kind of law that we have and how we protect our works in an 
Internet environment before we go there and tell them that they 
have their Internet problem and they are not solving it.
    Chairman Hatch. Mr. Mendenhall, go ahead, or Mr. Pinkos. We 
will go right across.
    Mr. Mendenhall. Just a couple of points in response to what 
you said. Your question, I know, was directed at Russia, but 
you also mentioned in the course of your comment our free trade 
agreements, CAFTA and others, and I want to pick up on that 
because one of the problems that we have when we talk about the 
enforcement obligations in the WTO and elsewhere is that the 
rules that we have in TRIPs, for example, are fairly blunt 
instruments.
    So what we have tried to do in CAFTA, as with our other 
trade agreements, is refine the enforcement rules. We have 
roughly 25 pages of our IP chapters dedicated solely to 
enforcement, much of it dedicated specifically at copyright 
enforcement to update the rules applicable in these countries, 
whether it be on the Internet, dealing with the specific issues 
related to the Internet, or even broader than that on other 
matters. So when it comes to our free trade agreements, we are 
refining and honing the rules and we have seen significant 
progress.
    Now, in Russia specifically, I certainly share the 
frustration that you expressed with Russia's failure to 
adequately enforce IP rights. I think we all recognize that. 
That is why we put them on the Priority Watch List this year. 
That is why we are going to continue to monitor it closely 
through the out-of-cycle review toward the end of the year. And 
I can assure you that it is an issue that has taken a very high 
profile, very prominent, in our discussions in the accession 
process and our IPR bilateral dialogue with them. We will 
continue to do what we can to impress upon them to make 
progress, but it is a serious problem. We recognize that.
    Chairman Hatch. Let me just ask one other question before 
turning to Senator Leahy. It is my understanding that the TRIPs 
provisions are a floor, not a ceiling, and I hope you agree 
with that statement.
    Does anybody disagree with that?
    [No response.]
    Chairman Hatch. Okay. Can you comment on whether it is the 
policy of our Government to attempt to negotiate in a TRIPs-
plus fashion, when appropriate, such as in the fast-changing IP 
areas? I will just mention one, e-commerce. These areas were 
not fully developed when the TRIPs provisions were adopted in 
the mid-1990s.
    Do you care to comment about that?
    Mr. Mendenhall. Sure. I can start, but my colleagues may 
want to jump in. Yes, TRIPs is a floor. Yes, it is ten years 
out of date, in a sense. Since then, there have been new rules 
that have emerged, internationally but not universally accepted 
in WIPO, for example, to deal with the Internet issue. Our 
FTAs, as I said, have a very intense focus on enforcement, 
including on e-commerce and the Internet. They do need to be 
updated--not the FTAs; the global rules do need to be updated 
in some sense.
    We are pressing in all of our bilateral dialogues, 
including with China, for example, the adoption of rules to 
bring their enforcement regimes up to snuff. Mr. Pinkos, I 
think, indicated that we are urging China to fully implement 
and adopt the WIPO Internet treaties. They have indicated to us 
that they would seek to do that this year, that the draft 
regulations in train, and we hold them to do that commitment. 
It is something that we have discussed at the JCCT, and we will 
continue to do that.
    But we are pressing our trading partners through our FTAs 
and outside of our FTAs and in any other context we can raise 
it, including through the special 301 process, adoption of 
rules that modernize the enforcement regimes and go above TRIPs 
standards.
    Chairman Hatch. Thank you.
    Mr. Pinkos.
    Mr. Pinkos. I think we have seen success with our FTAs in 
implementing TRIPs-plus, but it is increasing tough sledding in 
these multi-national settings like WIPO or at the WTO because 
there is really a very active anti-IP developing world 
sentiment. In these bodies that require consensus or near 
consensus to agree on things, it makes it particularly 
difficult to get further protections.
    As we saw with the GI case, the geographical indications 
case, we even have some differences with our European trading 
partners on the height or strength of IP protection. So it is 
tough sledding, but I think we are working really hard in these 
international organizations to try to push through some things.
    Chairman Hatch. Thank you.
    Senator Leahy.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman, and I am sorry that 
I was late. I want to commend you for having this hearing. I 
also wanted to submit for the record a statement by Senator 
Biden, who is on the floor, as you know, with a nomination.
    Chairman Hatch. Without objection.
    Senator Leahy. We Americans think globally as we enjoy the 
fruits of a lot of creativity of other Americans. I was just 
getting some messages here on a Blackberry, but that is just 
one example. Unfortunately, a lot of other people think 
globally and enjoy the fruits of people's creativity and 
innovation and they do it because they steal it. I pay for 
those things I get, as does the Chairman, but a lot of the 
advances of the digital age have eliminated a lot of the 
barriers between buyers and sellers.
    Software, music, photographs--any of those things can be 
sent around the globe. We saw the opening of the latest ``Star 
Wars'' movie. It had the biggest opening, I guess, of any movie 
in history, and within the first day they were downloading 
pirated copies and selling pirated copies overseas and some 
here in the United States. So it is a global problem.
    Because we are the world leader in intellectual property, 
we at least should be acutely aware of the impact on U.S. 
industry and our own citizens' creativity. Intellectual 
property is vital to our health. According to the International 
Intellectual Property Alliance, in 2002 the various copyright 
industries accounted for 12 percent of the U.S. gross domestic 
product. That is $1.25 trillion, and 11.5 million people 
employed, but they still lose hundreds of billions of dollars 
to piracy every year.
    The Business Software Alliance estimates its loss at $30 
billion in software sales annually. The MPAA estimates it loses 
$3 billion a year to piracy. The International Intellectual 
Property Alliance reports that the U.S. lost more than $13 
billion in trade due to copyright piracy in 2003. The FBI says 
that we lose $200 to $250 billion annually to counterfeiting 
alone.
    You have people who work very hard to develop, to create 
something. This is their livelihood, this is what they are 
proud of, and it is just stolen. We all understand if you break 
into somebody's house or warehouse and steal what is there, but 
these people are broken into maybe from 10,000 miles away.
    We focus today on China and Russia, and for good reason. 
The Chairman asked the pertinent question is Russia doing 
enough. Well, we all know the answer to that. China, in the 
year 2000, entered the World Trade Organization and I expressed 
concern about China's record on human rights and labor rights, 
a record which is terrible. When ultimately I voted in favor of 
establishing permanent and normal trade relations, I did note 
that isolationist policies do not work.
    For several years now, we have been engaging China in 
attempts to improve its record on piracy. Instead of progress, 
the United States Trade Representative's 2005 special 301 
report placed China on its Priority Watch List. The report 
notes that while China has expended efforts, we have not seen 
any meaningful reduction in infringement that China promised to 
attain. I sometimes wonder when you see raids for television, 
whether you raid the front end of the pirate business in China 
while work goes on at the back end. It has resulted in an 
estimated loss of $2.5 billion to $3.8 billion annually in 
pirated copyrighted works.
    Russia, as the Chairman has mentioned, is on USTR's 
Priority Watch List. We know that while Russia has passed 
numerous laws designed to improve intellectual property 
protection, enhanced enforcement has not followed. It is sort 
of like you pass a law and say we will have a law against 
burglary, but you can't put locks on your doors and the police 
won't ever bother to come around and check the place at night. 
Well, the law looks good on the books and nothing happens.
    The piracy rate for the recording industry is 66 percent; 
for the movie industry, 80 percent. Among the many problems in 
Russia is that the pirated goods that are confiscated by law 
enforcement--think about this--the goods they do confiscate so 
they can show us how hard they are working, 70 percent of it is 
returned to the market. It is sort of like, hey, everybody, 
look at this, we are getting tough here in Russia, we are 
grabbing this stuff. Okay, the camera is gone, give 70 percent 
back. You have got to have more than a revolving door. The 
copyright industry's estimated loss in Russia is $1.7 billion.
    Last week, Senator Cornyn and I introduced S. 1095, the 
Protecting American Goods and Services Act of 2005, to 
criminalize possession of counterfeit goods with intent to 
traffic, to close off the loopholes. In 1996, Senator Hatch and 
I worked together to pass the Anti-Counterfeiting Consumer 
Protection Act, which amended several sections of our criminal 
and tariff codes.
    We know it is more than a problem for just a few of us. We 
have to ask if the United States Trade Representative has 
adequate tools to address this issue. Do we need to strengthen 
our domestic laws through legislation like the legislation 
Senator Cornyn and I recently introduced? Do we have to engage 
more vigorously with China, Russia and other countries that 
don't enforce IP enforcement? I think the answer to all those 
questions is yes.
    I am probably preaching to a lot of the converted in this 
room, but, Mr. Chairman, we are hurting on this. The other 
thing is now we know it is not just some of these countries 
that are allowing this. We have organized crime syndicates 
turning to piracy. It is a lot easier than going out to rob 
banks. When they asked Willie Sutton why he robbed banks, he 
said, well, that is where the money is. Organized crime has 
always looked where the money is, whether it was selling liquor 
during Prohibition times, or drugs, or whatever. Piracy is a 
very easy way to go.
    I read Eric Smith's written testimony and it was very much 
like Marybeth Peters', who is a person who has enormous 
credibility before this Committee on both sides of the aisle. 
They mention the very disturbing possibility that this piracy 
may be funding terrorist groups. That is something that worries 
me. If terrorist groups are looking for money, why not go to 
piracy?
    Ms. Peters, did you want to add to that at all?
    Ms. Peters. Not really. I agree with you a hundred percent 
that the organized crime element that we see in the 
international arena should be of tremendous concern to 
everybody and not just the United States, but other countries.
    Senator Leahy. Well, you know, we put China as a member of 
the WTO on the idea that maybe this will help us get them to 
stop all the counterfeiting, but they keep right on doing it. 
Is there any reason to think that Russia will do any better if 
we put them in WTO, Ms. Peters, based on our experience so far?
    Ms. Peters. Well, I think that the possibility to bring 
about any kind of changes is during the entrance process, our 
ability to negotiate with them and what they need to do in 
order to become a WTO member, and make sure that they live up 
to those agreements. We hope that if the United States 
Government believes that that is where they should go that we 
will have managed to elicit more than promises, but effective 
actions.
    Senator Leahy. But have we seen much in what they have been 
doing so far to make us think that they are going to?
    Ms. Peters. No.
    Senator Leahy. Mr. Pinkos?
    Mr. Pinkos. From what I understand--and Mr. Mendenhall may 
want to take a shot at this--it has been pretty tough sledding, 
pretty tough negotiations, but we have been pretty strongly 
insistent that they make the IP commitments before we are going 
to acquiesce to their ascension to the WTO.
    Senator Leahy. Mr. Mendenhall?
    Mr. Mendenhall. It is a difficult issue, obviously. It is a 
complex issue. We have been in negotiations with Russia for a 
long time. Through that time, we have seen incremental 
progress, for example, in having Russia get its laws in shape. 
As with China and as with a lot of these other countries, the 
laws on the books don't matter a whole lot if they aren't 
enforcing them.
    But we have seen some progress in getting the laws in 
shape. We have emphasized to them that that is not enough, that 
they actually need to enforce those laws. They need to go 
forward and reduce the piracy and counterfeiting levels. We 
have made that a critical part of the accession package, the 
accession negotiations, as I indicated earlier. We have raised 
it at the highest levels and we will continue to do so to 
impress upon them the need to make progress on this issue as we 
go forward in the process.
    Senator Leahy. But what is going to make them do it? I 
mean, we can raise it to the highest level, but in the past 
nothing seemed to worry them. I bet you anything that if you go 
to downtown Beijing within hours of the time just about any 
movie comes out that is going to be kind of a blockbuster, or 
downtown Moscow, you can buy pirated copies. I have seen them 
there.
    What is enough of either a carrot or a stick to make them 
change, especially when it seems to be governmental policy to 
allow this?
    Mr. Mendenhall. Well, of course, that is the $64,000 
question. I mean, what is going to do it? As I indicated in my 
opening remarks, we have a series of tools that we have used--
you mentioned China, in particular--to gradually escalate the 
issue--actually, not so gradually. We have escalated the issue 
over the past year with China, starting with diplomatic 
initiative through the JCCT, working through an out-of-cycle 
review, stepping up from there to make a finding of Priority 
Watch List which, as I indicated, China has taken seriously.
    I can tell you that because they are here this week talking 
to us about it. They have expressed their concern about that 
listing as a Priority Watch List country. We are working with 
them further on developing an IPR action plan over the next 
couple of weeks and we are going to be resorting to WTO 
procedures, as I said, on the transparency side in the coming 
weeks. And if we still haven't seen progress, we need to think 
seriously about next steps that we need to take in the WTO or 
otherwise.
    So what we are doing is what I think we need to do with 
China, as we need to do with Russia. We need to speak with a 
unified and strong voice. We need to impress upon them the 
importance with which we take it, and I think it is almost 
important, frankly, to get them to change the mindset so they 
see it in their own interest. And we have started to do that 
through various training programs that the various agencies 
represented here have undertaken, as well as others have.
    We will get there, but it is going to be a slow process 
because as I said in my remarks, this is not your typical trade 
case. This is not a case where you need to change a number in a 
tariff schedule. You need to change the mindset. You need to 
get political will at all levels of the government to take it 
seriously. And if you want to change the mindset, that takes 
time. It is not a matter of simply changing a number in a 
tariff schedule, but we are using all the procedures and all 
the levers we have at our disposal to do it.
    Senator Leahy. Thank you. Thank you, Mr. Chairman. I have a 
number of other questions, but I will submit them for record.
    Chairman Hatch. Thank you so much, Senator Leahy.
    We appreciate all three of you coming. You have been 
helpful to us here today and we are going to have to work on 
this together. I think the next panel will have a number of 
suggestions on what might be done and I hope you will pay 
strict attention to what they have to say, as well. Maybe there 
are some ideas there that might augment some of the ideas you 
already have.
    We have got to put a stop to it. We have got to go after 
these people and we have got to go after these countries and 
get them to start being responsible to protect intellectual 
property. But we appreciate the work all of you do. Thanks for 
being here.
    Mr. Mendenhall. Thank you, Mr. Chairman.
    Chairman Hatch. Thanks.
    Our next three witnesses will be Eric Smith, President of 
the International Intellectual Property Alliance here in 
Washington, D.C., then Taylor Hackford, board member of the 
Directors Guild of America, from Los Angeles, California, and 
Robert W. Holleyman, President and Chief Executive Officer of 
the Business Software Alliance here in Washington, D.C.
    So we will start with you, Mr. Smith, and then we will go 
across to Mr. Hackford and then to Mr. Holleyman. Mr. Smith, 
you are first.

     STATEMENT OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL 
        INTELLECTUAL PROPERTY ALLIANCE, WASHINGTON, D.C.

    Mr. Smith. Thank you, Mr. Chairman and Senator Leahy, for 
again giving IIPA an opportunity to testify on the piracy 
problems the copyright industries are confronting globally. I 
am going to speak very generally on the topic and my colleagues 
here will speak to their particular industries in some more 
detail.
    This oversight hearing is extremely timely, as you have 
mentioned, because at this very moment a delegation from China 
called the IPR Working Group is meeting with the U.S. 
Government as we speak. In addition, USTR has just announced 
its special 301 decisions. This is the congressionally-created 
mechanism by which our Government seeks to improve IPR 
protection and enforcement globally, and to nurture those 
creative and innovative industries and individuals who 
contribute so greatly to our Nation's economic growth. Finally, 
there are currently ongoing talks between Russia and the U.S. 
looking toward Russia becoming a WTO member and to secure 
permanent normal trade relations. I want to briefly discuss our 
global problems and challenges, and then turn to the dire 
problems we face in Russia and China.
    As you know, Mr. Chairman, we represent the U.S. copyright 
industries. We have six member trade associations, 1,300 
companies, accounting for millions of U.S. jobs. You have 
mentioned those numbers. I won't repeat them. These companies 
and the individual creators that work with them are critically 
dependent on having strong copyright laws in place and having 
those effectively enforced.
    On average, the copyright industries generate over 50 
percent of their revenue from outside the United States, and in 
2002 contributed over $89 billion in exports and foreign sales 
to the U.S. economy. Given the overwhelming global demand for 
the products of America's creative industries, all these 
numbers would be significantly higher if our trading partners, 
particularly those like Russia and China that continue to allow 
piracy to flourish in their own economies, were to 
significantly reduce piracy rates by actually enforcing their 
copyright laws vigorously.
    First, I want to highlight the global problem. In our 600-
plus-page report which we submitted to USTR, we highlighted 
problems in 67 countries and their impact on the U.S. economy 
and U.S. jobs. Rampant piracy in most of those countries 
highlighted in this report constitutes the copyright industry's 
greatest barrier to trade, costing U.S. jobs and contributions 
to the U.S. economy.
    In our report, we identified six priorities or challenges 
we face in fighting piracy in partnership with our own 
Government. These challenges are amply illustrated by the two 
countries I want to especially highlight today--Russia and 
China.
    These challenges are, very briefly, Internet piracy and its 
impact on the growth of electronic commerce; optical disk 
piracy and the need to regulate it at the production level; the 
role of organized criminal syndicates in the piracy business; 
the problem of losses caused by unauthorized use of business 
software in governments and small businesses, and Mr. Holleyman 
will speak about that; book and journal piracy, both 
traditional and online; and the cross-cutting challenge of 
securing compliance with the WTO TRIPs Agreement, and 
particularly its enforcement provisions, and how the new free 
trade agreements are helping to achieve better protection. Our 
industries face all these challenges in Russia and China, two 
countries that are highest priorities and where we suffer huge 
and growing losses.
    First, Russia, and the problems in what it and the U.S. 
Government needs to do. Mr. Chairman, Russia is about to become 
the new China, as you have mentioned, as far as piracy is 
concerned. Let's look at a few statistics.
    You have mentioned that we lose over $1.7 billion due to 
piracy in Russia. That was in 2004, and $6 billion over the 
last five years. At the same time, the U.S. has unilaterally 
granted Russia over $515 million in GAP benefits in 2004. With 
its record, Russia should not be considered eligible to receive 
those benefits.
    As you have mentioned, piracy rates hover around 70 percent 
of the market, or higher, for every copyright sector. It has 
been recently estimated that Russia's annual manufacturing 
capacity for OD product now stands at 480 million disks. Demand 
for legitimate disks is unlikely to exceed 80 million in all 
formats. You can imagine what happens with the rest.
    The government of Russia has said that there are 18 plants 
on restricted access property, military bases, where simple 
entry is denied law enforcement. Forensic evidence indicates 
that at least 24 of the 34 plants are known to be producing 
pirate product. Russian-produced optical disks have been 
positively identified in at least 27 countries, seized in 27 
countries.
    However, the statistics only tell a part of the story. What 
they do not show is the poor reaction over the past ten years 
of the Russian government to their piracy problems. IIPA first 
raised the OD problems with the Russian government in 1996 when 
there were just two plants. The reason the problem has been 
allowed to escalate to 34 plants has been the Russian 
government's continued and deliberate failure to act, despite 
repeated promises to our government and to our industries. In 
short, what we face in Russia is a legacy of failed 
commitments.
    Let's look at the enforcement record. In 2004, there were 
eight actions taken by the Russian government against the 
optical disk plants, including raids and seizures of illegal 
materials. As Senator Leahy has said, 70 percent of the 
products seized went out the back door--unbelievable. All of 
the optical disk plants that were raided remained in operation 
after those raids. There are few, if any, criminal 
prosecutions. All that were prosecuted ended in suspended 
sentences. In ten years, there have been only two convictions 
with actual sentences.
    We and the U.S. Government have recommended six 
straightforward steps to deal with the optical disk piracy 
problem. They are detailed in my written testimony. The 
conclusion: none of them have been done. So what needs to 
happen?
    First, we cannot make the same mistake that was made with 
China, permitting Russia to enter the WTO without undertaking 
meaningful and WTO TRIPs-compatible enforcement actions. The 
actions we detail must be a pre-condition to such entry. These 
are not commitments we are looking for. This is action. We got 
commitments from China and now it is almost four years later.
    Second, if Russia fails to act, it should be designated a 
priority foreign country after the ongoing out-of-cycle review 
by USTR--something that we recommended and was not done in this 
last round.
    Third, we should deny Russia's eligibility for the 
generalized system of preference duty-free trade benefits. It 
has been five years since we filed that petition and it has 
been four years since USTR granted that petition. Russia has 
been on the Priority Watch List now for nine years. Mr. 
Chairman, it is time to act.
    Let me now turn to China. Mr. Chairman, we are in dire 
straits in China. Piracy rates have hovered at and over 90 
percent, as we have discussed here, in the more than 15 years 
that IIPA has been engaged with the U.S. and the Chinese 
government. Indeed, with the new digital copying technologies 
and the Internet, the situation has even worsened. Every year, 
industries have lost conservatively between $1.5 and $2.5 
billion. In 2004, it was over $2.5 billion.
    China is potentially the largest market in the world and is 
growing at a faster pace than virtually every country in the 
world. We have an important, in trade jargon, comparative 
advantage in the area of copyright, an advantage that hasn't 
even begun to be realized, while, as we know, China is 
continually taking advantage of their comparative advantage in 
so many areas, with a trade surplus with the United States of 
$162 billion.
    Of all the industry sectors represented in the U.S. 
economy, the copyright industries face a market more closed to 
them than to any other. Not only is nine-tenths of the Chinese 
market closed through piracy, but our industries suffer under 
onerous and sometimes discriminatory market access barriers. 
China's denial of effective market access prevents us from 
getting to know the market and establishing a presence that 
would enhance our ability to fight piracy. Even if we were to 
reduce piracy by half in China, under the present circumstances 
most of our industries could not satisfy the huge local demand 
because of these barriers. In short, these two problems are 
indelibly interlocked.
    Chairman Hatch. Mr. Smith, would you try to wrap it up?
    Mr. Smith. Yes.
    Chairman Hatch. We allot five minutes. You are almost ten 
minutes.
    Mr. Smith. We believe that the failure to use the criminal 
law to fight piracy is a violation of China's TRIPs 
obligations. We believe that the Chinese criminal law, because 
it does not encompass all acts of copyright piracy on a 
commercial scale, also violates the TRIPs Agreement. Because of 
all this, IIPA has urged USTR to engage in a new multilateral 
dialogue with China. Following USTR's announcement of the 
results of their out-of-cycle review, we are closely to develop 
the elements of a possible WTO case.
    We ask two things: first, that China immediately commence a 
significant number of criminal actions against pirates of our 
products and impose deterrent penalties; and, second, that 
China now eliminate the onerous and destructive market access 
barriers that prevent U.S. copyright-based companies from doing 
real business in China.
    Thank you very much.
    [The prepared statement of Mr. Smith appears as a 
submission for the record.]
    Chairman Hatch. Thank you, Mr. Smith.
    Mr. Hackford, we will turn to you.

STATEMENT OF TAYLOR HACKFORD, BOARD MEMBER, DIRECTORS GUILD OF 
                AMERICA, LOS ANGELES, CALIFORNIA

    Mr. Hackford. Senator Hatch, Senator Leahy, thank you for 
inviting me here. I am here today on behalf of the Directors 
Guild of America, which represents 13,000 directors and members 
of the directorial team, which accounts for assistant 
directors, production managers, et cetera. Those teams work in 
feature films, television, commercials, documentaries and news. 
Our mission is to protect the economic and creative rights of 
directors and their teams.
    I think most people tend to think of the movie industry as 
the glitz and glamour of Hollywood, movie stars, et cetera, but 
the reality is that most jobs are behind the camera and they 
are located all over this country. We are talking about those 
names that scroll up the screen at the end of a film, hundreds 
of names for every film, tens of thousands of people who work 
in this industry.
    Now, those employees are just the ones that work in the 
film industry. There are a lot of other people, small 
businesses, that have their livelihood, their bread and butter, 
in the film industry also--cleaners that clean costumes, rental 
cars, trucking, many, many things. As you well know, the 
entertainment industry and the information industry in this 
country account as the second largest export that we have. All 
of these jobs and that industry are currently at stake, are at 
great risk, which you have heard about today.
    Now, it is an incorrect assumption in the piracy debate, 
usually made by people who are interested in open access, that 
once a film is out and gone into the theaters, it is over and 
it just comes back then perhaps as profit to the studios. 
Nothing could be further from the truth. There is a process in 
the entertainment industry called residuals. This is a crucial 
element in our business and let me explain why.
    We are not on a weekly salary, or a monthly or a yearly. We 
work freelance. Every single film we make, depending on its 
success, could be our last. Therefore, you work on a project, 
you put your lifeblood into it, and you hope in the long run 
that it is going to do well. The residuals from our productions 
that come back from free and pay television, through DVDs, 
through video cassettes--that money that comes in feeds our 
health and pension plan and is really the bread and butter that 
keeps us alive.
    What we are facing today is a market where over 55 percent 
of the money that comes back from films comes from outside the 
United States. The whole issue of piracy, both within and 
especially from outside the United States, is seriously 
threatening our livelihoods, our bread and butter income.
    So when pirates steal a movie--and that is exactly what it 
is; it is robbing--they are not just robbing revenues from the 
studios; they are taking our money that we need to live on and 
hopefully exist in the future. Moreover, it is not just the 
films that we make. It is about the films that have not yet 
been made, and let me explain.
    When you go out to make a film as a film maker--and I am 
film director and producer--you don't just make it like this. I 
want to give you a case in point. I just made a film this past 
year called ``Ray.'' It was a film about the life of Ray 
Charles. It took me 15 years to make this film.
    Senator Leahy. Incidentally, one of the best movies I have 
seen in years.
    Mr. Hackford. Thank you very much, Senator.
    Senator Leahy. I am not trying to give plugs on it, but I 
went to that and I have urged all my kids to go to it. I have 
urged all my friends to go to it. It was a tough movie.
    Mr. Hackford. It was.
    Senator Leahy. But it was a good movie, really good.
    Mr. Hackford. Thank you very much.
    I thought today one of the things that I could do was try 
to put a personal face on this issue and talk about a project 
like ``Ray'' that I was personally involved in, and you can see 
the process of what has happened with that particular film.
    As I said, it took 15 years and it was not easy, for some 
reason. You have seen the film and you liked the film, but it 
was very hard in Hollywood to find anybody who would finance 
it. I had a passion for this film. I believed in it. I had made 
the commitment to Ray Charles himself and worked with him for 
15 years, and in the process I finally came to the point where 
I did find somebody to make the film.
    In this industry, it is a huge risk. People are putting up 
a lot of money, and with smaller films like ``Ray'' this is a 
much bigger problem than a film like ``Star Wars'' that 
everyone knows is going to go out and play in the theater and 
millions and millions and millions of people are going to see 
it. The smaller films, the riskier films, are the ones that are 
most affected like this, like ``Ray'' was.
    Now, luckily for me, I convinced an individual to actually 
finance the movie. He was advised by everyone not to do it. 
Luckily for him, the film was done very, very film. Luckily, we 
had a distributor, Universal, that picked the film up and did a 
very, very good job. So, in reality, everybody made out, but 
you should realize that only four out of every ten films made 
makes it money back from theatrical receipts. Less than that 
number--I think it is something like only six films out of ten 
ever make their money back at all. So it is a hugely risky 
thing.
    I want to give you the case of ``Ray.'' When Universal 
released the film, it was the end of October. The same week it 
opened, I walked down Canal Street in New York City and the 
video cassette was on sale, complete with the art work. These 
people had done all the work ahead of time, and when they got 
the disk they put it out. Now, we happen to know from research 
that Universal has done that it was videotaped at the Raceway 
10 Westbury Theater, the Loews Raceway 10 in New York and the 
Loews Jersey Garden Theater in Elizabeth, New Jersey.
    Now, they immediately took that videotape and they put it 
on the Web. They sent it to Russia and China, and immediately 
started that process, the things that you were talking about of 
generating it. So the fact is that it was on sale a week after 
its release, or the week of its release--pardon me--because I 
saw it the day after it was released here in New York, 
California, Florida, Georgia, Texas and worldwide.
    Chairman Hatch. When you talk about release, you are saying 
in the theaters.
    Mr. Hackford. I mean the DVD was for sale.
    Chairman Hatch. Yes, because the DVD you came out with 
later was like three months later.
    Mr. Hackford. Three months later. This is an important 
thing. The DVD was on sale in Europe before--we didn't release 
the film in Europe for another two months.
    Chairman Hatch. What you are saying is you had the film in 
the U.S. theaters. You hadn't yet hit Europe. You hadn't yet 
done your own DVD of it.
    Mr. Hackford. We hadn't done our DVD.
    Chairman Hatch. And a day after the film was released, you 
had DVDs on the street at a very discounted price.
    Mr. Hackford. Absolutely. You had DVDs on the street.
    Chairman Hatch. Without any payment of any copyright 
royalties at all.
    Mr. Hackford. Nothing coming back.
    Now, what then happened is three months later, at the 
beginning of February, we released the DVD. Immediately, that 
high quality--first of all, the camcorder version was not very 
good quality, but still that didn't stop millions of people 
from buying it. Then on February 1, we went out with a DVD, and 
immediately that went on the Web for downloads.
    Now, just to give you an idea, last week, one day, May 19, 
on the peer-to-peer networks there were more than 476,000 
requests for ``Ray.'' Since the film was released and first 
pirated in October, there have been 42 million requests to 
download ``Ray.''
    Chairman Hatch. That is without any payment of royalty or 
any copyright--
    Mr. Hackford. Nothing, nothing. I think that kind of tells 
you what we are facing. If I had that much trouble raising the 
money to make the film--luckily, the film worked critically and 
commercially, and the people are going to make their money 
back. But those people didn't know that. They were told this 
was going to be a risk and they might not get it back.
    Now, if you tell them that you can go out and you can make 
the film and before they can see anything back, millions and 
millions of copies--in fact, the other thing that is important 
to say is last year was the first time in history that DVD 
revenue exceeded box office. The future is clear. The DVD is 
going to be the profit leader in this industry.
    So when I am going to an investor and trying to raise money 
for a film and that person already knows it is a big risk and 
now knows that before the film even plays in a theater, it can 
be on the street, it is going to be devastating to our 
business. And that means devastating loss of jobs and 
obviously, as I said before, to this country. If it is the 
second largest balance of trade export, it is going to be 
devastating to our economy, and obviously something things to 
be done.
    Chairman Hatch. Plus, a loss of creativity, loss of star 
power, loss of people's opportunities to excel in the arts, et 
cetera.
    Mr. Hackford. I think the important thing about the movie 
business--and again I don't want to put it all in commercial 
terms. I am an artist. I think when you put something together 
in a film--let's take Ray Charles. Ray Charles is to me the 
epitome of the American experience, and let's not talk about 
race. This is a blind man who in this country was able to make 
himself a legend, who was able to, through his own talent and 
fortitude, go out there. That is a message that you send to the 
world about America.
    If this industry and the things that we are communicating 
about this country and the industry that we are creating that 
will bring revenue back to this country is destroyed--and it 
will be unless we do something--I think that, yes, I am 
speaking personally. Myself, my colleagues, the people I work 
with--and again they are not just the movie stars, but all 
those people that go into--I don't work alone. I am not a 
painter at an easel or a novelist at my typewriter working 
alone. It is a collaborative effort. All those people go into 
making my film as good as it is, and those people are going to 
be out of work.
    So I am here today to express this personal plea to you, 
and I want to also thank both of you and your Committee for all 
the work that you have done. Your interest in this has been 
pioneering. The laws that you have helped enact have really 
helped us. People are just now starting to wake up even in my 
industry. But we appreciate that and the Directors Guild is 
here to help you in any way we possibly can in the future 
because we share your concern and understand the vital nature 
of this problem.
    Chairman Hatch. Thank you.
    [The prepared statement of Mr. Hackford appears as a 
submission for the record.]
    Senator Leahy. Mr. Hackford, I think I can probably speak 
for both of us in saying that if you worked hard to create 
something, you ought to have the satisfaction of knowing it is 
your creation. Now, if you do a bad job and it doesn't sell, 
fine. That is a risk you take, whether somebody paints a 
picture, writes a song, writes a book or anything else, or does 
computer software.
    But if you have done something good, you ought to get 
rewarded for it. It ought to be yours, in the same way that if 
you have got something in your own home, you shouldn't have 
somebody steal it. You shouldn't have something that is your 
creation be stolen.
    Senator Hatch and I have wrestled with this and I think we 
have demonstrated to the country that it has not been a 
partisan issue. We are very concerned about this. I want people 
to be able to compete in the marketplace. If their product 
sells, they benefit by it. If it doesn't sell, well, that is 
the risk they take, as anybody does who goes into the 
marketplace. But it shouldn't be stolen any more than if you 
own a furniture store and you create nice furniture; somebody 
shouldn't break in and steal your furniture.
    Mr. Chairman, I am going to have to leave at this point. I 
apologize. Mr. Holleyman, of course, has been so 
extraordinarily valuable to this Committee over the years, to 
all of us here. I have read the testimony and I will leave some 
questions for the record. It is unfortunate. I know you have 
had a million things going on today and I have got a conflict, 
but I thank you for holding the hearing.
    I can't tell you how much I want to close the door. I am a 
former prosecutor and I would like to just be able to go out 
and prosecute everybody who is doing this. You probably would, 
too, but I wish there was some way we could close the door. We 
are never going to get it completely closed, but we can do a 
lot better job than we are.
    Thank you.
    Chairman Hatch. I just want to thank Senator Leahy because 
he takes a tremendous interest in these things, and we get 
together on these matters. We get together on a lot of things, 
but we particularly get together here. I don't think there is 
even a division between us in almost any area that affects you. 
I just feel it is a great privilege to work with him, as well, 
because he takes a great interest in these issues.
    Let me just say that you are raising issues here that 
should affect everybody in America. This Committee is going to 
do everything it can, but we need more help from the 
intellectual property community as to how we might domestically 
pass some laws that might be of aid to you. We have been trying 
to do that, but they haven't exactly worked as well as would 
like them to work. They are working in some ways, but not as 
well as we would like.
    So we need your help. We need the best thinkers in all of 
the aspects of the intellectual property community and the 
high-tech community to assist us. As you know, there is a real 
divide between some in the high-tech world and some in the 
intellectual property world, or should I say the copyright 
world. So we have got to bridge those gaps and try to be fair 
to everybody.
    Let me just also say that I am also first ranking on the 
Senate Finance Committee and will take over as Chairman if I am 
fortunate enough to be reelected. We handle the trade issues 
and I can guarantee you I am not going to be very open to China 
and Russia if they are not going to clamp down and do something 
about it. I might as well warn the administration right now 
that unless they are willing to start demanding that they abide 
by international norms, they are going to lose a very advocate 
for free trade in me. I don't think it is a question of free 
trade as much as it is a question of thievery.
    Mr. Hackford. Well, there is a free trade issue, too, Mr. 
Chairman.
    Chairman Hatch. Well, there is.
    Mr. Hackford. When they put a cap on and when they say that 
only 20 films from outside China can be distributed, what is 
also happening is the studios are thinking about going to China 
to make films to get around that, which means that takes jobs 
out of America to do that.
    Chairman Hatch. That is one of their ideas to get you to go 
there.
    Mr. Hackford. Yes.
    Chairman Hatch. But I am very concerned about this, and it 
isn't just the movie industry. It is the publishing industry, 
it is the music industry. We have seen tremendous dislocations 
there.
    We will turn to Mr. Holleyman, who will put a wrap-up on 
this.

 STATEMENT OF ROBERT HOLLEYMAN, PRESIDENT AND CHIEF EXECUTIVE 
     OFFICER, BUSINESS SOFTWARE ALLIANCE, WASHINGTON, D.C.

    Mr. Holleyman. Mr. Chairman, I want to thank you and 
Senator Leahy for inviting the Business Software Alliance to 
testify at today's hearing and for your very persistent 
attention to the problem of piracy over the years.
    As I think this panel has shown, piracy is an issue that 
affects individual creators. It affects collaborators, it 
affects shareholders, it affects national economies, and it 
affects future creators as well. Last week, the BSA and the 
IDC, which is the leading information technology market 
research firm, released a report showing that in 2004 the value 
of pirated software worldwide actually increased, despite a 
modest one-percentage-point decline in piracy rates.
    In 2004, the world spent more than $59 billion for 
commercial packaged software. Yet, software worth over $90 
billion was actually installed. So for every two dollars' worth 
of software purchased legitimately, one dollar's worth was 
obtained illegally.
    The BSA has also worked with IDC in looking at the impact 
of reducing piracy on jobs and tax revenues. We have shown 
globally that a 10-point reduction in piracy can yield 1.5 
million new jobs, $64 billion in taxes, and $400 billion in 
economic growth. And in North America alone, a 10-point 
reduction in software piracy would yield 145,000 new jobs, $150 
billion in additional economic growth, and more than $24 
billion in tax revenues.
    While there are many countries that I could talk about, 
today I would like to focus on two--Russia and China. Both of 
these markets should be tremendous opportunities for our 
industry. The potential as software markets, and indeed as 
software suppliers one day, is significant, but it is today 
largely unfulfilled.
    Russian software piracy last year--87 percent of the total 
market was pirated software. It has been stuck in the high 80s 
for several years. Russia has adopted a number of legal reforms 
over the past several years, and while they give us some hope 
that there may be improvements in the marketplace, we have yet 
to see that realized.
    Indeed, the piracy situation on the ground in Russia is 
mixed. Our companies, on the one hand, are seeing some progress 
in addressing their channel enforcement issues by working with 
Russian law enforcement authorities. Yet, very little is being 
done to address end user organizational piracy, which is the 
largest single problem that the software industry faces in 
Russia, and indeed in every country around the world.
    Internet piracy is also a growing challenge in Russia and 
an area where we have had little success. Pirated software from 
Russia is being promoted and sold all over the world using spam 
e-mail and delivery by e-mail. Mr. Chairman, I have examples 
that I have printed out of some of the spams that are being 
originated in Russia that are being sent to unsuspecting 
consumers in the United States and around the world that then 
link you to slick websites that advertise software for a 
fraction of the normal retail price. These prices, however, are 
high enough to convince some consumers that the offer is 
legitimate.
    There are a whole host of other problems I can outline, but 
we are hopeful that the WTO accession mechanism will be the way 
that we can finally begin to see some improvements in Russia.
    Switching to China, last year the piracy rate was 90 
percent in China, down two percentage points from the year 
before, but still far too high. Much more needs to be done. 
Consider this: China is now the second largest market for 
personal computers in the world, but it is only the 25th 
largest market for software. The gap between hardware and 
software sales is huge and it is growing.
    I would like to recommend for specific improvements for 
China and its IP regime. First, they must extend criminal 
liability to enterprise end user piracy. It is absolutely 
critical that there be criminal penalties for organizational 
end user piracy.
    Two, they have to reduce and clarify criminal thresholds. 
Three, they have to increase the administrative penalties for 
infringement. Fourth, they need to ensure that the government 
itself is using only legitimate software. The goal of all of 
this is to increase the legitimate market for software in 
China, and that will benefit all software suppliers, whether 
they are U.S. or Chinese origin.
    Let me say, Mr. Chairman, before I conclude that we have 
looked at a lot of measures in the past of how China addresses 
enforcement--the number of actions they are bringing, the 
publicity for those actions. We think those are important, but 
experience has now shown that that is insufficient. We have to 
look creatively at new benchmarks that we can put on the table 
that will not only show the number of cases, but that will also 
show demonstrable market growth. We are working with USTR and 
the Commerce Department now in looking at some options to put 
on the table in the context of JCCT that will expand the type 
of benchmarks that can be used.
    Let me conclude, Mr. Chairman, by saying that we make the 
point here and with our allies around the world that reducing 
piracy benefits all creators. It benefits the entire channel 
for the distribution of legitimate product. It benefits U.S. 
companies, but it benefits domestic producers.
    In each of these countries, I go hand in hand with local 
developers to make this case, but it has been through the 
persistent efforts of this Committee and the U.S. Government 
that we have been armed with the tools that we need. We look to 
you for continued help and you have our pledge of support.
    [The prepared statement of Mr. Holleyman appears as a 
submission for the record.]
    Chairman Hatch. Well, thank you. A lot of people don't know 
in this country that we are way behind some of these other 
countries, including China, with regard to some of the aspects 
of the high-tech world. A lot of those Ph.D.s and a lot of 
those highly educated engineers were educated right here in 
America, which is good, but then they go home and they know how 
to suck the lifeblood out of our economy.
    Mr. Hackford, just a rough estimate. How many people 
totally were involved, from writing, to production, to post-
production, to marketing, to DVDs in the film ``Ray?'' Let's 
just use that one film.
    Mr. Hackford. Well, during the production I would say there 
were 150 people that were directly--we shot the film in 
Louisiana, in New Orleans, and we had a crew there. But in the 
post-production process and in the marketing, you could 
probably add another 150. I mean, that is for one film.
    Chairman Hatch. But that doesn't count all the people in 
the movie houses and everybody else. It is hundreds of 
thousands of people.
    Mr. Hackford. No, no. Then, in fact, as the film goes out 
and plays around the country, it is an interesting question.
    Chairman Hatch. You are talking about hundreds of thousands 
of job for one film.
    Mr. Hackford. In the movie industry, without question, 
without question. But the reality is that there is what we call 
a multiplier effect that I love. When we go into a community, 
people think it is just the crew that goes there, but when you 
go in, you have all the small businesses that literally make 
their--as I said before, make their livelihood based on films.
    One of the things that is interesting that is happening 
right now in this country is it is spreading out from 
Hollywood. I mean, I happened to make ``Ray'' in Louisiana. 
They put up incentive, and thanks to you and other people we 
were able to get a Federal bill passed to bring jobs back to 
the United States.
    But you can see what happens when an economy is infused. 
Louisiana went from $12 million a year in film production to in 
the last two years $500 million. People want to work in this 
country, and what is important is that jobs are being created 
in different States. The film community is not just in 
Hollywood, but this is a profession and the problem that I have 
is we create, we have the best talent in the world--and I am 
not talking about talent in front of the camera, I am not 
talking about actors. We have the best people and we have 
created an industry here.
    Of course, we did create it from the outset, but it is 
still there. I would like to see that continue to flourish 
because it helps this country lead in the area of intellectual 
property.
    Chairman Hatch. Well, I will go back to engineering and I 
will go back to experts in your field. If we don't do something 
to encourage kids to get into math and science, we are not 
going to have the engineers and we are not going to have the 
people who can even keep a film industry going the way it needs 
to go. And we are going to be out-competed all over the world, 
and it is inexcusable when we are the number one nation in the 
world in all of these aspects.
    The same thing in music. You know, I know a number of 
writers who are just excellent and barely get by. You know 
actors that really are very, very good, but barely get by. 
There are some who hit it very big and that is great. You are 
one of the directors who has become very successful and wealthy 
in the process, but the fact of the matter is not many are able 
to do that.
    And to find investors to go into these areas is very, very 
difficult because there is hardly anything more dangerous for 
investment than getting into the entertainment world. Unless 
you really know what you are doing and you really have top 
people, you are going to lose your shirt. It is just that 
simple, as a general rule, whether it is in movies, whether it 
is in books, whether it is in CDs, music, you name it, and it 
is totally unfair.
    For instance, you are happy because ``Ray'' made some money 
and it made money for your investor.
    Mr. Hackford. It could have made a lot more, as you can 
tell.
    Chairman Hatch. Yes, and you could have become even more 
wealthy. But, see, that is the short-sightedness on this. What 
it meant is that the investor and you, if you had had the extra 
money, would be much more likely to take more risks and give 
other people an opportunity to greater films, do greater music.
    A lot of these films take music, a lot of these films take 
special actors, a lot of these films take all kinds of sets and 
a lot of these films take geographic locations. There is an 
awful lot that goes into it. People just think it conjures out 
of the air. It is like our young people--you know, I told the 
whole recording industry they ought to capture Napster that was 
getting 80 million hits a day and then educate our young people 
that what they are doing is thievery and use Napster to do it.
    Well, gradually, we have come a long way that way, but I 
still see a tremendous dislocation, except maybe in country 
music, in the music industry, because our young people are not 
downloading as much in the country area as they are in others. 
So the country area has been pretty good.
    I can't tell you the really outstanding music writers that 
I know who have to take other jobs because they just simply 
can't make it on the current royalty system and the current 
stealing of their copyrighted works under current conditions. 
So, naturally, I am very concerned about this and I am very 
concerned about our movie industry. There are successes, of 
course. Like you say, six out of ten aren't so successful.
    Mr. Hackford. Right. As a songwriter, you know how the 
music industry has been savaged because there is less 
information and it is easier to go. But the fact is that 
technology marches ahead. Right now, at Cal Tech in California 
they have developed a technology that will allow individuals to 
download a high-quality digital copy of any film in three 
seconds.
    Right now, the only thing that has held it back is that it 
takes a long time. But as this technology starts to become part 
of our system, it will just be rampant. Again, there has got to 
be a technological solution, in addition to an educational 
solution. These are all things we have to work on.
    Chairman Hatch. I agree with that. There has got to be some 
way. And, of course, you have people in the high-tech world who 
don't believe in copyright, even though they couldn't exist 
without copyright, but they take a short-sighted viewpoint. 
That is why we are all watching Grokster right now. We can't 
wait until that Supreme Court decision comes down, and at least 
from my perspective hopefully they won't treat it the same as 
betamax because there is only one reason for Grokster's 
existence as far as I can see and that is to enable the 
pilfering of copyrighted materials, illegal downloading of 
copyrights materials.
    And when that is so, I mean you might be able to find some 
peripheral use of that, but that is the primary reason for 
that. And our young people are being led down a primrose path, 
too. I hope the Supreme Court thinks about that, that if they 
don't come up with the right decision in Grokster, they are 
aiding our young people to think that everything on the 
Internet is free, even though it is not and even though our 
copyright laws teach otherwise.
    I have heard young people who say, who cares? It is my 
computer and I can do whatever I want to do. Once you have that 
attitude on one thing, it permeates a lot of other things and 
it deteriorates society far below what our society should be.
    So I personally appreciate all three of you being here 
today. You have laid out some pretty important problems and you 
have made some suggestions, but there are no simple solutions. 
We are a long way from having the trade agreements work 
perfectly and we are a long way from having China and Russia, 
two of the biggest thievery countries who just won't get this 
under control--and they have the capacity to do it. I know 
that, because they don't have nearly the stringent laws that we 
do and if they wanted to take care of this, they could take 
care of it. We know about the 30-plus facilities in Russia and 
if they want to take care of it, they can.
    As far as I am concerned, they don't belong in the WTO 
until they do. I would be very strong supporters of theirs if 
they would straighten this out. And I have got to say if people 
like Orrin Hatch don't support them, they are not going to make 
it. It isn't that I am so great. It is just that I am in a 
position where I can do some things that some people can't. I 
just want freedom and fairness and decency and honor in our 
country, as well as their countries, and I am just hoping that 
some of them will be watching these hearings to realize that we 
mean business on this. We are sick and tired of it.
    We want them to have a great film industry and we want them 
to have a great music industry, a great publishing industry, a 
great television industry, a great software industry, whatever 
you want to call intellectual property, ad infinitum. And we 
are willing to compete with them, but we want to do it on a 
fair basis.
    Well, this has been a really wonderful hearing as far as I 
am concerned. It is highly technical maybe for some, but 
anybody watching it has got to say we have got to do something 
about these problems. And you guys are at the forefront of 
trying to do something about it and I just want to commend you 
for it, but take our request here and let's come up with some 
ways that will help us to pass the right laws so that we can 
help you more, because there are some things that we can do. 
And then we have to get to our young people and get them to 
realize there are right ways of doing things and wrong ways of 
doing things, and that they should be doing the right ways, not 
the wrong ways.
    Well, with that, thank you all for your time. I am sorry to 
keep you so long, but it is an interesting area for, I think, 
so many of us, but especially for Senator Leahy and me, and we 
are grateful that you would come and testify today. Thanks so 
much.
    With that, we will leave the record open for one week for 
additional submissions, anybody who would like to make those 
submissions. And if anybody has a good argument on the other 
side, I am interested in that, too. So we will leave the record 
open and recess until further notice.
    [Whereupon, at 4:19 p.m., the Subcommittee was adjourned.]
    [Submissions for the record follow.]



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